Smart Investor: bull or bear? Value investors don't care

I would like to be a value investor, but would like your advice since I have just retired and have some money to invest and willneed income to supplement my pension.

Happy2b - Look for companies that have a Low P/E Price over earnings ratio. A ratio of 10 would mean that the price placed on the company as a whole is ten times the profit each year. In other words, the company is making 10% return on equity each year. Some of that money is likely to be paid out as dividends and the div yield is another good measure of performance. If all the earnings were paid out as dividends then the dividend yoeld would be 10%. There are a number of companies with dividend yields above 5% including National Grid, Vodafone, and Aviva. You should look at a few years data to verify that this year's data is representative. Hold on to the shares until the P/E ratio is nearer 15 and then sell. Then repeat with other companies.

I would feel rather happier in using value as my main or only criterion if I did not remember losing money on companies that carefully hid the real situation in their accounts. You have to assume that what you see in the accounts is true, and accounts are difficult enough to interpret as they are.

JK seems to assume that if you buy shares in a company with a P/E ratio of 10, the ratio will always rise to 15. Sorry, 'tain't so. If it was, you wouldn't need investment managers. And it is possible to buy a share with a P/E ratio of 43 (ASOS) in April and be sitting on an 80% gain today.

Dividends? If you buy a share with a dividend of 5% which drops in value by 10% over the year you have LOST 5%. Personally I just regard dividends as a nice bonus if and when they arrive, but there's no way I would ever buy a share just for its dividend. It's far from uncommon for a share to lose more value in one day than its annual dividend.

Isn't the important word "value"? I go for shares that retain their value, and dump them when the value drops. As JK says, "then repeat with other companies"!

happy2b, it's not easy, there is plenty of advice to be had, but whose do you take, I, like most other private investors doing it myself have found one only learns the hard way. Income may be derived from dividends or growth and taking profits ( a bit uncertain year on year). At present people are going into good stable companies offering a good dividend 3.5% upwards, businesses with good brands difficult to compete with and for the populace to do without ( whoops, did I mention tobacco and vodafone). Up till now strategics such as oil, mining, and gold have served me in good stead. However, from experience over twenty odd years of such toil I find the average investor will do no better than the market, say around 4% per annum; one has moments of brilliance or rather there are times when everyone is piling into such as in the techie bubble and then there are miserable times - it is easy to lose the big gains - such as we have experienced when things go pear shaped. I have found it profitable to find good companies and stick with them through thick and thin; there aren't many, so you can't keep chopping and changing. If you are looking for a little excitement and more spectacular growth then there are the smaller younger companies to play with, but beware the risk. If you are just starting don't fill up all at once put your money in a piece at a time you can average out the ups and downs to some extent, though if one feels optimistic I find one tends to go the whole hog as it were with an individual company. Bear in mind the market is as much a reflection of general sentiment as it is of specific valuations of companies, psychology is a factor in addition to the study of profit and loss, call it gut feeling.

Bear in mind there are plenty of people around after your money, beware boiler rooms, bucket-shops - are the more blatant - look into google for explanations.

There are no simple answers. You can spend a lifetime analysing and still get it wrong. However my experience indicates that a good decision is as much to do with understanding the mentality and business acumen of the managers as it is about recent historical data.

Directors of companies with large personal holdings can suddenly and without prior warning suddenly sell out if they think the time is opportune, and who is likely to know better than them.

I have learnt to keep a close eye on directors dealings and follow what they do, NOT what they say.

Successful investors say: If don't understand the business then you shouldn't be investing. Of course this is perfectly true, but the fact is no one can be absolutely certain. Everyone has to accept some risk.

Personally I like small to medium sized companies which produce simple, easy to understand accounts with low gearing (i.e. most of the finance of the business has been raised by the issue of equity and only a small proportion is in the form of bank borrowings). Ideally no borrowings at all, and a healthy ammount of cash in hand. Remember shareholdings are risk bearing whereas bank borrowings are a liability which can be secured against assets in the event that there is insufficient revenue to service and/or repay the debt.

Some investors also say if you don't understand the MARKET then you shouldn't be investing.

At the moment I think the "market" is just treading water, there is no indictative direction. Things will change when we are able to digest the implications of the autumn budgetary review and the general public's reaction to announcements of austerity measures. If we get widespread strikes and public protests then the stockmarket will crash, regardless of fundamental viability. On the other hand, if most people come to realise that what must be done, must be done, and accept the governments decisions, then we are likely to see a Santa Claus Rally.

I like to think that what I do is based on information and reasonable fore thought. I am not a blind gambler, therefore I intend to stick with cash until the new year.

Dear happy2b Like you, I have recently retired but, unlike you, I have been trying to be a ‘value investor’ for ten years with mixed results. My feeling, for what it is worth, is that unless you are remarkably dedicated or very well-informed, you are better off placing about 80% of your available cash with five to eight good fund managers. I could recommend some funds but Citywire provide an excellent service that will allow you an informed choice.

By all means keep 10 to 15% for personal investment – you might even see how you perform against the funds – The remaining 5 or 10% could be in cash (bonds seem to be a no no at present). I wish you well in your retirement and hope you don’t spend too much of your time buried in the financial pages!

Mike

I can remember only a couple of years ago when Lloyds TSB was a value stock and then BP. Now the income part of my portfolio is with with funds like Newton Higher Income (and the Global version) , Invesco etc plus recently a dividend ETF ishares FTSE UK Dividend Plus but they all invest in similar underlying assets like BP, GSK, BAT etc

happy2b - just been discussing your situation with our investment research team here. Here's a summary of what they said.

Value investing pays off, but generally only over a long time horizon. It takes patience and resilience, and it's probably not the best approach to generating a supplementary retirement income.

Our advice for someone in retirement would generally be to focus on income-generating funds (rather than individual stocks - though as Mike O'Neill says there's no harm in testing yourself against the pros if you want to be more involved and can afford to make the occasional slip-up) which can give you a stable yield while hopefully generating capital growth. A short while back we highlighted a few of our favourites:

http://citywire.co.uk/money/ask-citywire-what-are-the-best-funds-for-generating-income/a425016

Usual disclaimers: this doesn't constitute individual advice, everyone's situation is different, and investments can fall as well as rise, etc. But hopefully it gives you a starting point!

Happy investing

Rich

I think all of the above blogs highlight certain aspects of investing in the stock market. Together perhaps they could form a good guide for evena semi-professional.

Perhaps what I would like to say is that your attitude to money and life should also be considered-do you want to play safe or can take a degree of risk?

Good luck!

Thanks to all for your words of wisdom. Can I just ask whether th view is that the market is still overvalued?

If so I wonder whether I should hold of investing and buy some pre,mium bonds instead

What next for gold ? We have been there before have'nt we ? There was a time when prophets of doom forcasting the death of equity markets, oil prices went sky high to nearly $140+ and following that everybody piled into gold sending gold price sky high from $400 to nearly $900 .Then what folowed , can anybody remember I do because I had my fingers burnt in gold , gold shares and miners not only that I also got sucked into the technology bubble and before I could guess the bubble got burst showing losses of upto 98% . So my friends if any of you are showing any substantial gains in gold now is the time to bank them in while the main crowd is getting sucked into it in the hope that gold will touch $2000 .IT may

well do . But is'nt a bird in hand better thab the two in the bush ? Many a times the greed of taking the extra penny in profit makes the timing so late that the profit dwindles down faster than you can imagine . The whole excercise is about perfect timing, of which nobody else can be a perfect judge except yourself ?

I am no financial whiz-kid .It was just a thought from my past experiences which I think may help somebody who is at the crossroads of decision making where I myself have been so many times hoping of a lead

from fellow readers as I do not believe in financial advisors . Any comments ?